Shares in takeover target Cove Energy dropped 8.1pc on concerns authorities in
Mozambique may impose a tax that could derail any sale of the Africa-focused
oil explorer.

Oil explorer Cove put itself up for sale in January and since then it has received several takeover approaches, including £1bn offers from Royal Dutch Shell and PTT Exploration, the state-controlled Thai energy group. Two Indian companies – Gail India and state-backed ONGC – are currently weighing a bid.

However, the sale process may slow down after Mozambique’s minerals minister Esperanca Bias said the government wanted to impose capital gains tax on the sale of Cove, which owns a stake in a large natural gas field off the coast of the country.

“We are monitoring the negotiations and what we have said is that we are going to put in place a capital gains tax,” said the minister.

It had been thought Cove would have avoided paying tax to Mozambique by selling itself outright rather than disposing of individual assets, as fellow oil explorer Heritage Oil did with its interests in Uganda. After Heritage sold its Ugandan assets to Tullow Oil in 2010 for $1.45bn (£914m), Uganda imposed $404m in capital gains tax. The tax was challenged in London and Kampala, and the argument delayed completion of the deal.

Leighton Thomas of broker Cannacord Genuity said it's going “a bit pear-shaped for Cove”. He added: “Clearly any tax liability lies with Cove, and hence its shareholders will receive less of any price achieved.”